Higher taxes on the rich will not protect the poorest if spending is slashed.

We may no longer be in recession, but the nation still faces a critical year ahead. Choices that the government makes over wealth taxes and welfare spending in particular will shape the political economy, not just for the year ahead but for decades to follow, and recent signs are not encouraging. Beginning with George Osborne’s Autumn Statement on 5 December and culminating with a short and probably bitter Spending Review, the next year or so is the political equivalent of Alex Ferguson's "squeaky bum time" – only with livelihoods, not football, at stake.

The Tory party’s re-toxification under Cameron has continued apace since their party conference, whether through atavistic evidence-free posturing on crime and punishment, employment law or on welfare cuts – the latter, in particular, would ruin any chance the government has of keeping its promise of not balancing the books on the backs of poor.

Osborne doggedly adheres to a macro-economic platform being shown day by day to be more broken and discredited than previously thought. His insistence that reducing the deficit takes precedence over balancing the economy distorts spending decisions, and leaves today’s government and those that follow with their hands seemingly tied to a dangerous spiral of ever-harsher spending cuts. An alarming report from the Social Market Foundation and the RSA shows that closing the deficit on a rigid timetable, primarily through cuts, with neither tax rises nor growth playing a larger role, leaves us facing an additional £48bn of austerity. The knock-on effects on both demand and the quality of public services, and hence prosperity, are unthinkable – there comes a point, when you’re in a hole, to stop digging, and that time is now.

The determination to bring the deficit down by cutting welfare spending stems from the fallacy that feckless workshy scroungers are raiding the Exchequer, when the evidence shows that 93 per cent of new housing benefit claims are from in-work households and that the main driver of higher welfare spending is that we live longer. It’s the failure of wages to keep pace with spiralling cost of living – housing and fuel in particular – that means so many require in-work support. The Tories should be arguing for a living wage and investment in green growth if they want to shrink state spending in the long run, not cutting support to those who lose out in a dysfunctional economy. Senior Liberal Democrats are realising that further welfare cuts are unjustified – the party must not just reject £10bn in welfare cuts but anything in that region should universal benefits for better-off pensioners remain untouched.

Coalition is of course about trade-offs and compromise, but only up to a point. If the government decides to cut yet more from the welfare budget – without fixing the dysfunctional markets in pay and housing that leave millions needing in-work benefits – then is some form of higher tax on property an adequate trade-off? Most Lib Dems would say not, and those who will suffer the most from such a deal would no doubt agree. Alternatives to slashing welfare spending for the poorest do exist, including some from CentreForum, which advocates reforms to tax breaks for the wealthy. Using a mix of such reforms targeted to those who can afford to pay, and further flexibility in the speed of deficit reduction, the poorest could be protected from bearing the brunt of austerity; if only we had a more politically aware Chancellor.

The country faces a crucial twelve months, and of course we need a government that shows coalition can work, a united government. The question is, for whom should government be made to work, the parties who constitute it or the people they serve? Behind which policies should we unite? The Tories clearly refuse to make it work for millions whose living standards have fallen and whose lives have become more insecure, as their refusal to tax wealth and insistence on further welfare cuts shows.

Now more than ever, Liberal Democrats need to do more than just show that coalition works, but that it works for people in real world who are bearing the brunt of our economic malaise. Acquiescing to Tory demands in the vain hope of benefiting from government unity is not enough. The party’s leadership needs to show that the value of having Liberal Democrats in government is more than diluting Tory regressive tendencies, by clearly setting out how they’ll navigate next 12 months, and what they will not countenance.

Prateek Buch is director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee. He writes in a personal capacity.